Changing the Game

As the race to produce cellulosic ethanol commercially progresses, companies such as Coskata, Inc. need to remain at the top of their game, or in some cases, change the way the game is played.

By Sam Nejame | June 03, 2009

In early 2008, when General Motors Corp. announced an investment in Coskata Inc., the little known start-up was thrust into the public spotlight and everyone wanted to know what all the fuss was about. Coskata said it could make ethanol from cellulose, municipal waste, old tires and you name it, for less than a $1 a gallon. The fuss was about a potentially game-changing technology. In the whirlwind year that followed the announcement, the country saw $148 a barrel oil and the worst Wall Street banking crisis since the great depression. In these interesting times and in the heat of raising a third round of financing, Coskata CEO, Bill Roe, took time out to talk with EPM about the current and future state of the biofuels industry.

Q: General Motors Corp. doesn't fool around. It's in a situation with public relations where it needs to look smart. GM investing in Coskata, makes a powerful statement. How did the relationship come about?

A: We were feeling out the major auto firms to understand what interest there might be in what we were doing. We didn't know it when the call went into GM, but one of their research departments was doing a very comprehensive study of next-generation ethanol companies. GM is committed to developing an array of propulsion and fuels systems. On one hand, the company was working on increasing mileage on existing internal combustion engines, but also looking at flexible fuel, electrics, hydrogen fuel cells and hybrids. They came to the conclusion that the electric and hydrogen fuel cell vehicles are part of the solution, but biofuels can have the most near-term impact. It takes 17 years to turn over the car park and the infrastructure build-out would require either a lot of imagination or fantastic development. So they concluded that E85 and flex-fuel vehicles were the short term solution.

This investment was nothing material to GM, but it certainly was important to us, because it legitimized what we were doing, having passed their tests in terms of speed to market, integrity of the technology and our management team. This is about is making the statement that they are committed to ethanol, they are committed to flex-fuel vehicles and they're committed to helping build out the infrastructure so that people will have a choice.

Q: What are your thoughts on the Big Three automakers committing to make 50 percent of their fleets flex-fuel capable by 2012?

A: The actual technology to produce a flex-fuel vehicle is well in hand, but it has to happen on the manufacturing floor not as a retrofit. You need to make a couple of changes to the fuel injection system, add some corrosion resistance and a computer chip to sense the ratio of ethanol to gasoline in the tank. At the factory this amounts to $100 to $500. We believe that it is critical that the Big Three live up to this commitment, or go even further than making 50 percent of their fleets flex-fuel capable by 2012 to provide the consumer with choice at the pump. It is even more important that they use flex-fuel vehicles as a path to selling additional vehicles and economic recovery.

Q: What do you think about the oil companies? Some have embraced renewable fuels and others are sticking to their core competencies.

A. Well, there is a spectrum. I think Exxon Mobil is simply truthful right now about its position and they seem indifferent at best. Then I would say not on the absolute opposite, but certainly behaving very differently, would be Chevron Corp., who seems to be not only embracing alternatives, but doing something about it. This joint venture with Weyerhaeuser that they call Catchlight Energy LLC appears to be very real and very forward thinking—lining up massive amounts of biomass. They've put together the right infrastructure and technologies to convert biomass to a variety of different fuels and they've certainly got the marketing outlet. They're very progressive. I think some of the oil companies are dragging their feet because they see this as a nuisance. It's a pain to figure out how to do fuel blending. It's a pain to be mandated. It's all done on such a huge scale—150 billion gallons, there's nothing small about it. It's just staggering what has to happen for all of us to get fuel conveniently and we all take it for granted. The American Petroleum Institute certainly has an interesting task representing so many different views.

Q: Right now we have about 150 regional petroleum refineries—none built since 1976. If it's decided that biorefineries need to be co-located with biomass resources, this could mean that thousands of smaller facilities need to be built. How will this happen?

A: It truly could be thousands, depending on the scale. The reality is that you want to produce the fuel near where the population centers are. You want to produce fuel from locally grown crops, because you don't want to get into the massive transport of fuel or feedstock. The sweet spot is going to be 100 million gallons plus or minus. You can't get economics to work if you're moving feedstock much more than 50 miles. You can't really go smaller because the capital costs will eat you up. I've heard idealistic stuff about small towns converting their own garbage, but if we want to get to 50 billion to 60 billion gallons of ethanol by 2030, biorefineries in the 50 to 100 MMgy capacity are necessary.

Q: How will we pay for this?

A. You get there over extended periods, which coincide with the rate you can get engineering firms to design and build, the rate at which the agricultural complex will evolve and change and the rate the fuel marketing complex will change. We're talking really about an evolution over a 20-year period. Our particular model is a licensing model. It basically gets a footing under the company before we think of investing in operating assets. Our models have us maxing out at a rate of 12 to 15 plants per year. We gut checked it against ICM [Inc.]. The [engineering and construction firm] commissioned around 40 ethanol plants in one year at its peak.

I think the financing will be somewhat similar to what we've seen in the grain belt. Some of these were built by giants and financed off balance sheets and levered up. Some were built by co-ops and financed by a combination of equity and debt. I think it's essentially the corn-ethanol model, but over a much broader geographic expanse and much closer to the cities. Instead of doing it in a couple of years, we'll be doing it over a 20-year horizon if we want to take a big bite out of oil consumption.

Q: The mandates for undefined fuels are small, but growing. While Coskata is about commercialization, many next-generation technologies still seem to be about science. What are your thoughts about other methods?

A.: It may even be proven technology, but there may be scale up and integrative details to be worked out. The notion that there could be an engineered organism that can produce heavier hydrocarbons is a great thing. And I hope it happens. I do think the time lines are very different for some of these things.

This is the kind of problem or opportunity that brings out the best in entrepreneurial endeavors. Some of these companies will never get out of the lab and some will fail during start-up. What I think is fascinating is that for a lot of these biological approaches—whether it's algae or super bugs or engineered enzymes—the technology is advancing so rapidly that I don't know if anyone can really tell what these time lines might realistically be. A few years ago, it took a life's work and millions of dollars to decode the genome of an organism. Now it involves weeks of work, a modest investment of thousands and you're there. The science is speeding up exponentially. So, as soon as we say something is futuristic and a science experiment, the answer is "yes, but watch this space" because at some point there will be technologies that eclipse what we're doing. It makes me very hopeful. It's just unfortunate that we're doing this under duress. We should have done it 20 or 30 years ago when the OPEC valves started to close and we had the first oil crisis. It just wasn't done and, true to form, when the valves opened up again a lot of this stuff went on the shelf. The difference this time is the valves are wide open and we still don't have enough. The world has moved and now we have a crisis. EP

Sam Nejame is principal at Promotum, a technology management consulting company. Reach him at sam@promotum.com.